This CMBS is a Pure Play on a Single Big Box Retailer

Goldman Sachs and Bank of Merrill Lynch, Pierce, Fenner & Smith Incorporated are securitizing a loan with the first lien on a portfolio of Toys “R” Us and Babies “R” Us stores, according to rating agency reports.

The deal, dubbed TRU Trust 2016-TOYS, will issue $472 million of notes backed by a single, $512 million loan secured by 123 stores with 5.1 million square feet of rentable area across 29 states. The loan bears interest at an interest rate equal to one-month LIBOR plus 4.2% and matures in three years, though the borrower has the option to extend the maturity date for two successive one-year terms. If all of the extension options are exercised, the final maturity date will occur in November 2021.

Aside from the trust asset, the portfolio of property is also encumbered by an $88 million mezzanine loan with a fixed interest rate of 12.5%.

Even without the mezzanine loan, the portfolio is highly levered, compared with other single loans backing mortgage bonds rated by Standard & Poor’s. S&P calculated the loan to value ratio at 98.3%, based on its valuation of the portfolio, though the LTV is only 58.3% based on Cushman & Wakefield's "as is" valuation of the portfolio.

The trust loan balance has debt service coverage (DSC) of 1.50x, calculated using the 4.2% assumed spread plus the 2.5% LIBOR cap and S&P Global Ratings' net cash flow (NCF). However, including the $88.0 million mezzanine loan, the DSC falls to 1.08x based on S&P Global Ratings' NCF, the 4.2% assumed spread on the trust asset, the 2.5% LIBOR cap, and the 12.5% fixed rate on the mezzanine loan. These DSC coverages would lower if the base interest rate rose above the 2.5% cap and the cap provider failed to meet its obligations. The interest rate cap agreement has not been executed yet, but based on the terms in the loan agreement, the agreement would allow the counterparty to support ratings up to 'AAA' based on our counterparty criteria.

Among other risks to the deal, according to S&P, is the fact that a large portion of the property pool (52 out of 123) is not in or near a major retail offering, and therefore does not benefit from the foot traffic that other nearby shops create.

Also, the properties are currently self-managed by the borrower, an affiliate of Toys "R" Us . “Should Toys "R" Us default, a replacement property manager would have to be found for all of the 123 properties, which may delay necessary repairs, capital expenditures, and leasing efforts,” the rating agency states in its presale report.

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